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If you don’t have, don’t want, or can’t qualify for a credit card, you may consider a prepaid credit card as an alternative. With a prepaid card, a certain amount of money is loaded onto the card at the time of purchase. You draw upon these funds until the money is used up. Unlike traditional credit cards, prepaid credit cards do not report transaction or payment information to the major credit bureaus. That means that prepaid credit cards will not help build credit directly.

Do Prepaid Cards Build Credit?

Having or using a prepaid credit card will not have any impact on your credit score. That’s because one of the major differences between a prepaid credit card and a traditional credit card is that prepaid credit cards do not report transactional or payment information to the major credit bureaus. As such, that activity cannot have an effect on your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Understanding Prepaid Credit Cards and How They Work

When you use a traditional credit card, you are borrowing money from the credit card issuer. Then, each month when the statement comes due, you make a payment toward the loan the credit card company has issued you. This payment history is reported to the major credit bureaus. Other potential lenders will review how much credit you have open and how reliably you make payments on your debt obligations to help them decide if they want to issue you additional credit.

On the other hand, a prepaid credit card does not offer access to revolving credit. With a prepaid credit card, you will first purchase the card, and the purchase amount will be loaded onto the card. Then, you can use the card at participating retailers. Each purchase that you make will get subtracted from the total value that is stored on the card. Once the total value hits $0, the card will no longer be usable unless it can be reloaded with more money.

Recommended: When Are Credit Card Payments Due?

Who Might a Prepaid Credit Card Be Suitable For?

There are certain groups of people for whom a prepaid credit card might be an ideal solution. This includes those with poor credit and those who desire the flexibility that a credit card can offer.

People With a Poor Credit Score

One group of people who might get value from a prepaid credit card are those that have a poor credit score or limited credit history. If you’re not able to qualify for a traditional credit card, or are concerned with how much a credit card costs, you might want to use a prepaid credit card for transactions where using a card is required or preferable.

People Who Want the Flexibility of a Credit Card

If you don’t have a credit card or prefer to use cash for most of your transactions, there still may be some circumstances where you might appreciate the flexibility of using a credit card. If that description fits you, you should explore the benefits and risks of prepaid credit cards, and decide if one might be right for you.

How Can a Prepaid Card Build Your Credit Rating?

Since prepaid credit cards do not report payment or transactional usage to the major credit bureaus, they won’t build your credit score directly. However, getting in the habit of using a credit card responsibly can help prepare you for when you do have a traditional credit card. Starting those habits can keep you from making some of the common credit mistakes that can harm your credit score.

When Should You Use a Prepaid Credit Card?

A prepaid credit card can be a good option for people that need or want to use a credit card but don’t have a traditional credit card. This could include when making purchases online or when making a purchase where you want to make sure there is an electronic record of the transaction.

If you are trying to get a credit card cash advance, however, you may want to consider another option. Most prepaid credit cards will not allow you to get cash back.

Secured Cards vs Prepaid Cards

There are several different types of credit cards, one of which is a secured credit card. A secured credit card is similar to a prepaid credit card in that you have to make a deposit or purchase upfront to load value onto your card.

However, a secured credit card allows you to regularly reload value onto your card. A secured credit card also reports usage information to the major credit bureaus, which can make it one way to help with establishing credit.

Alternative Ways to Help You Build Credit

Besides secured credit cards, there are a few other ways to help you build your credit. Some options include:

•   Becoming an authorized user: One path is being an authorized user on the credit card account of a trusted friend or family member, whose responsible use of credit could positively impact your score.

•   Making on-time payments on other debt obligations: Another possible way to help build your credit is reliably making payments on other types of debts, like student loans, car loans, or personal loans.

•   Getting a cosigner: If you’re hoping to get a loan or unsecured credit card to begin building your credit, one way to increase your odds of approval is by getting a cosigner. Just know that this means that person will also be on the hook for your debt if you fail to repay it, so make sure to abide by credit card rules to avoid that situation.

The Takeaway

Prepaid credit cards can be a great way to make a purchase when using cash is not an option or is less advantageous. However, it’s important to understand that prepaid credit cards do not send information about your transaction or payment history to the major credit bureaus. That means that having or using a prepaid credit card will not have any impact on your credit score. If you want a credit card that reports transactions to the major credit bureau, you’ll need to have a more traditional type of credit card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

While SoFi does not offer prepaid credit cards, we do offer traditional credit cards.

FAQ

What challenges are involved in having prepaid credit cards?

One challenge is that any transactions or payment history associated with a prepaid credit card are not reported to the major credit bureaus. That means that using a prepaid credit card will not help you build your credit. There also may be some types of credit transactions where the merchant will not accept a prepaid credit card.

Can prepaid cards be run as credit?

In some ways, prepaid cards work just like traditional credit cards. This means that typically, a prepaid card can be run as credit when making a purchase. Additionally, depending on the merchant and the type of prepaid card you have, you may be able to set up a PIN and use your prepaid credit card as a debit card. But prepaid cards do not report activity to the credit bureaus, so responsible use won’t build your credit.

Do prepaid cards damage credit?

Prepaid credit cards do not report any type of purchase or payment history to the major credit bureaus. So while this means prepaid credit cards can’t help build credit, they also will not damage it.

Do prepaid cards report to credit bureaus?

No, prepaid cards do not report to the major credit bureaus. Any purchases that you make on a prepaid credit card will not have any impact on your credit score, either positive or negative. So if you are working on establishing credit, you will need to use a traditional credit card or another type of financial instrument that reports usage to the major credit bureaus.

Photo credit: iStock/Visiondreams

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC-Q125-012

An at-the-money (ATM) option is one where the strike price is at or very near the current price of the underlying stock itself. At-the-money options have no intrinsic value, but they may have value due to their potential to go in the money before they expire.

Options traders must understand the difference between the three types of options’ “moneyness:” at the money, in the money, and out of the money.

What Is At the Money?

Conventionally, being at the money means that a given option’s strike price is identical to the price of the underlying stock itself. Both a call option and a put option can be at the money at the same time if their strike price is the same as the price of the stock.

In the age of decimal stock pricing, however, it is rare for an option’s strike price to exactly equal the price of the underlying stock. The at-the-money strike is usually considered the one closest to the stock’s price.

Understanding At the Money

Usually, an option that is at the money will have a delta of around 0.50 for a call option and -0.50 for a put option. This means that for every $1 of movement of the underlying stock, the option will move about 50 cents.

Some options traders employ more complicated strategies, such as an at-the-money-straddle. This involves buying or selling both an at-the-money call and an at-the-money put on the same underlying asset with the same strike price and expiration date. This strategy offers the potential to profit from large price swings in either direction. It also carries the risk of loss if the underlying price stays near the strike, as both options may expire worthless, costing the investor the net premium paid.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

At the Money vs In the Money vs Out of the Money

Usually there is one option strike price considered at the money, with any other strike prices being either in the money (ITM) or out of the money (OTM). The difference between ITM and OTM is that an in-the-money option is one that has intrinsic value, meaning it would be profitable to exercise it today.

A call option is in the money when the stock price is above the strike price, while a put options is in the money when the stock price is below the strike price.

Out-of-the money options have no intrinsic value and will generally expire worthless if they remain out of the money at expiration.

Consider the following call or put options for stock ABC with a current price of $55.

Recommended: Call vs. Put Options: The Differences

At the Money and Near the Money

An option is considered near the money usually if it is within 50 cents of the price of the underlying stock. However, it is common for investors to use the terms “near the money” and “at the money” interchangeably.

This is because stocks are priced to the nearest cent, while option strike prices are usually only to the nearest dollar or half-dollar, depending on the magnitude of the underlying stock price. It is rare for a stock to have an option that exactly matches any specific strike price.

Pricing At-the-Money Options

Because an at-the-money option has a strike price at or near the price of the underlying stock, it has no intrinsic value. Any value in an ATM option primarily consists of extrinsic value, meaning the portion of an option’s value determined by its potential to increase in value before it expires, measured by factors such as its time to expiration and implied volatility.

Options have the potential to provide greater returns, relative to the cost, than directly purchasing stock if the underlying asset moves favorably, but options investors also face the risk of losing their entire investment if the market moves unfavorably.

At the Money and Volatility Smile

A “volatility smile” is a graph that shows implied volatility across different strike prices, typically forming a curve that resembles a smile. This pattern generally shows that implied volatility is often lower for at-the-money options compared to those that are in-the-money or out-of-the-money. That said, it’s important to know that not all options fit into the volatility smile model.

Pros and Cons of Trading At-the-Money Options

Here are some pros and cons of trading at-the-money options:

The Takeaway

Understanding the difference between options that are at the money, in the money and out of the money is crucial if you want to trade options through your brokerage account. Prices with these three different types of options contracts react differently to movements in the price of the underlying stock, so make sure you buy the right one based on your overall strategy.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

What does buying at the money mean?

When you buy an at-the-money option, you are buying an option whose strike price is at or near the price of the underlying stock. An option that is at the money generally has a delta value of around positive or negative 0.50, depending on if it is a call or a put. That means its price will move about 50 cents for every dollar that the price of the underlying stock moves.

How do at the money and in the money differ?

An at-the-money option is one whose strike price is at or near the price of the underlying stock. An in-the-money option is one with a strike price that would be exercised if the option closed today. An at-the-money call option is one whose strike price is at or lower than the stock price, while an at-the-money put option is one whose strike price is at or higher than the stock price.

Is it best to buy at the money?

There are several different strategies for trading options, and the strategy you trade will help decide whether it’s a good idea to buy at the money. It can certainly be profitable to buy or sell at-the-money options, but other strategies for making money with options exist as well.

Photo credit: iStock/DMEPhotography